Market insights and analysis

By Will Hubbard

Market snapshot

•  Stocks: Stocks were down last week on mixed economic news. 

•  Bonds: Fixed-income markets remain closely tied to Federal Reserve statements, but investors are feeling the pinch of rising consumer prices, which may cause economic issues if left unchecked.

•  Gold: Gold and the U.S. dollar both appreciated last week, driven by inflation concerns and ongoing geopolitical uncertainty.

•  Market indicators and outlook: Market regime indicators show we are in a Normal economic environment stage, which is historically positive for stocks, bonds, and gold but with a substantial risk of a downturn for gold. Normal is one of the best stages for stocks, with limited downside. Volatility is Low and Falling, which favors stocks over gold and then bonds.

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The major U.S. stock indexes were mostly down last week due to market volatility. The Russell 2000 small-cap index lost 2.72%, the Dow Jones Industrial Average fell 2.36%, the S&P 500 dropped 1.52%, and the NASDAQ decreased by 0.45%. The 10-year Treasury yield increased 0.12% to 4.52%. Gold showed continued strength, increasing by 0.63%.

For the latest information on our Quantified Funds, check out our weekly fund updates. You can also see the daily holdings of the funds here.

Stocks

Last week saw several key economic reports, including the consumer price index (CPI), producer price index (PPI), the minutes from the Federal Open Market Committee (FOMC), unemployment claims, and the University of Michigan’s Consumer Sentiment Survey.

The CPI release increased by 0.4% in March and rose 3.5% over the last 12 months, surpassing the Federal Reserve’s inflation target of 2%. Notably, the core CPI, which excludes volatile food and energy prices, also rose 0.4%. This broad-based rise in core prices indicates that inflation pressures could be more widespread and sticky than initially thought. Investors reacted negatively to this release as it suggests the Federal Reserve may struggle to meet its goals for interest-rate cuts for the year.

Following the CPI release, the Federal Open Market Committee (FOMC) published the minutes from its March meeting, which conveyed a cautious, and possibly slightly hawkish, stance. The minutes indicated a shift in expectations for the federal funds rate, suggesting a potential delay and reduction in the scale of anticipated rate cuts. This adjustment responds to stronger-than-expected economic data and slower-than-anticipated declines in inflation rates.

Regarding future policies, the minutes revealed that “participants judged that the policy rate was likely at its peak for the tightening cycle, and almost all participants judged that it would be appropriate to move policy to a less restrictive stance at some point this year if the economy evolved broadly as expected.”

On Thursday, the PPI for March showed a 0.2% increase in both the headline and core figures. The core PPI value was in line with expectations, while the headline figure was 0.1% below the forecast, indicating that supply-side price pressures might be easing. Markets rebounded from Wednesday’s sell-off and rallied on this news.

Unemployment claims were slightly lower than expected, with 211,000 claims reported compared to the anticipated 216,000. Additionally, the University of Michigan Consumer Sentiment survey fell to 77.9, below the expected 79 and the previous figure of 79.4.

Technically, the S&P 500 has been in a strong bull market rally since October 2023. Since the end of the first quarter of 2024, the market has crept uncomfortably close to its 50-day moving average (DMA). According to Bespoke Investment Group, there have been only 10 longer bull market runs with consistent closes above the 50-day moving average since 1953.

Bespoke noted that the sector leadership we’ve seen bounce around since October has recently started to wane. At the end of March, all sectors were trading above their 50-day moving average. However, currently, five sectors and the Russell 2000 index have fallen below their 50-day moving average. Should there be another sell-off similar to last week’s, the markets could be in for some trouble.

Last week's equity market activity highlighted that investors are acutely concerned about the economy, particularly regarding interest rates and what the Federal Reserve has to say about them. Stocks tend to react positively when the Federal Reserve adopts a more dovish stance, but announcements of further delays in rate cuts make investors nervous. Navigating these waters is difficult. The best thing investors can do is to try to minimize emotional biases as much as possible.

Bonds

Last week, the 10-year Treasury yield increased by 12 basis points to 4.52%. The rise in yields and corresponding drop in prices occurred as the Federal Reserve postponed its projected rate decreases. Market participants are eagerly anticipating a decrease in yields, expecting it to occur sooner rather than later.

While CPI continues to decline, many everyday investors aren’t feeling the impact on their finances. In fact, auto insurance rates across the U.S. are up 26% from last year. On the bright side, health insurance costs have come down quite a bit. According to the U.S. Bureau of Labor Statistics, the most recent data shows that health insurance costs are down about 33% from their high in September 2022, as illustrated in the following chart, which shows the unadjusted cost of health insurance on average across all U.S. cities.

If this sounds absurd, it’s because the BLS measures the cost of insurance based on the retained earnings of health insurance providers. Generally, the assumption is that premiums either cover benefits or contribute to the retained earnings of the business. Thus, by measuring retained earnings, the BLS aims to more accurately reflect inflation in health-care costs. More retained earnings at higher premiums would indicate reduced quality of care and inflation pressure on medical services.

This brings us back to the central issue of interest rates. Credit card interest rates hit another high in the first quarter of 2024 and are likely to remain elevated as long as overall interest rates remain high.

Mortgage rates are also near their recent highs, maintaining levels last seen in the mid-2000s, just below 7%.

Since the pandemic, interest rates and home prices have both surged, significantly increasing the cost of homeownership. As the Fed knows, this rise has made housing a pressing issue, particularly for Americans in their 20s who are not yet homeowners.

The Federal Reserve is keen to lower rates, but until conditions permit, rates will remain high, and long-term bonds will continue to carry higher interest rates. Market strategist Charlie Bilello emphasizes this by monitoring the fed funds futures market to highlight market expectations.

If the Fed has its way, rates will decrease to 4.85% from the current 5.25%–5.50%, with a target of closer to 4% by the end of 2025.

The bottom line is that markets are hard to predict, but the Federal Reserve has been clear about its intentions; the timing remains the only question. Changes in the fixed-income space are expected to occur quickly, so investors should determine how they want to navigate an environment where interest rates are closely managed. Employing active strategies to adapt to shifts will help align portfolios with the prevailing interest-rate conditions. Rapid changes could occur with just one signal from Fed Chair Jerome Powell.

Gold

Last week, gold rose by 0.63% to close at $2,344.37 per ounce, bringing its year-to-date return to 13.64%. The increase in gold prices can likely be attributed to renewed inflation concerns following higher-than-expected CPI and hawkish remarks from the Federal Reserve, as well as ongoing geopolitical tensions in the Middle East.

In recent years, the U.S. dollar has not shown a correlation with gold. Last week, however, both assets appreciated, indicating that investors are gravitating toward perceived safer assets like the U.S. dollar and inflation hedges like gold. This shift caused both to experience increased demand.

Flexible Plan Investments is the subadviser to the only U.S. gold mutual fund, The Gold Bullion Strategy Fund (QGLDX), designed at its introduction 10 years ago to track the daily price changes in the precious metal.

The indicators

The very short-term-oriented QFC S&P Pattern Recognition strategy started last week 170% long, reduced exposure to 160% long on Monday’s close, jumped back to 170% long on Thursday, and scaled back further to 150% on Friday. Our QFC Political Seasonality Index spent the week in its risk-on posture. (Our QFC Political Seasonality Index is available—with all of the daily signals—post-login in our Weekly Performance Report section under the Domestic Tactical Equity category.)

Our intermediate-term tactical strategies have been varied in their degree of defensive positioning. The key advantages these strategies offer to investors are their ability to adapt to changing market environments, participate during uptrends, and adjust exposure to more defensive posturing during downtrends.

The Volatility Adjusted NASDAQ (VAN) strategy started last week 175% long, increased exposure to 200% long on Wednesday’s close, scaled back to 180% long on Thursday, and dropped back to 160% long to finish the week. Our Systematic Advantage (SA) strategy took a more risk-on stance last week, moving from 90% long to 120% long on Monday where it ended the week. Our QFC Self-adjusting Trend Following (QSTF) strategy was 200% long all week. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

Our Classic model was long risk-on positioning all week. Most of our Classic accounts follow a signal that will allow the strategy to change exposure in as little as a week. A few accounts are on more restrictive platforms and can take up to one month to generate a new signal.

Flexible Plan’s Growth and Inflation measure, one of our Market Regime Indicators, shows markets are in a Normal economic environment stage (meaning inflation is falling and GDP is growing). Historically, a Normal environment has occurred 60% of the time since 2003 and has been a positive regime state for stocks, bonds, and gold. Gold tends to outpace both stocks and bonds on an annualized return basis in a Normal environment but carries a substantial risk of a downturn in this stage. From a risk-adjusted perspective, Normal is one of the best stages for stocks, with limited downside.

The S&P volatility regime is registering a Low and Falling reading, which favors stocks over gold, and gold over bonds from an annualized return standpoint. The combination has occurred 37% of the time since 2003. Typically, this stage is associated with higher returns and less volatility from equities and bonds.